Global political tensions leave investors on edge

Investors have become increasingly worried that the recent flare-up in international political tensions poses a fresh risk to the flagging global economy.

The outbreak in global friction comes as the Chinese Communist party is expected to appoint the new political class of the world’s largest economy within a month, and less than two months from the US presidential elections.

At this stage, the biggest risk comes from the increasingly rancorous relationship between China and Japan – the world’s second- and third-biggest economies – after Tokyo last week nationalised a group of gas-rich islands claimed by Beijing.

Tokyo paid ¥2.05 billion ($US26 million) to buy the Senkaku islands – known as Diaoyu in China – from their private owner.

The move triggered widespread and violent anti-Japan protests in China on the weekend, prompting dozens of Japan’s largest companies to temporarily shut down their factories and stores.

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Panasonic Corp closed its factory in Qingdao, Shandong province, after demonstrators broke some of the factory’s windows and destroyed some equipment.

And at least two Japanese car makers – Honda and Mazda – temporarily halted production at their Chinese factories.

Fast Retailing – owner of the popular Uniqlo casual clothing chain – closed seven of its 145 stores, while the photographic group Canon said it would suspend operations at three of its four main factories in China for two days.

More protests are expected on Tuesday, which is the 81st anniversary of the 1931 Mukden or Manchurian Incident, in which the Imperial Japanese Army blew up a section of railway as a pretext for invading northern China.

The protests come at a time when rising Chinese labour costs are prompting Japanese firms to shift their manufacturing operations into other South-East Asian countries.

But China remains Japan’s biggest trading partner, as well as being a rapidly growing market for Japanese consumer goods.

Trade between the two countries reached $345 billion last year, and there are worries that the souring political relationship between the two countries could weigh on economic activity, at a time when both Tokyo and Beijing are clearly concerned about slowing growth.

The Chinese government appears caught between wanting to admonish Japan for its actions, and recognising that the protests could damage both economies.

Last week, Chinese Premier Wen Jiabao was reported by the state-run Xinhua newsagency as saying the islands were an inalienable part of China’s territory, and that China would “absolutely make no concession" on issues concerning its sovereignty and territorial integrity.

On Monday, the People’s Daily, which is the organ of the Chinese Communist Party, acknowledged that economic sanctions could have negative consequences.

But it argued that Beijing had no alternative.

“If Japan continues to provoke China, China must fight back."

The Japanese economy, it warned, “would not be immune" to Chinese retaliatory action, which could see Beijing could target Japan’s manufacturing or financial sectors, as well as specific export products.

Meanwhile, in the United States, US President Barack Obama has charged up his anti-Beijing rhetoric by announcing the US would file a broad new trade case against China at the World Trade Organisation.

The latest complaint, which is expected to be popular in working class industrial mid-eastern states less than two months out from the US presidential election, accuses Beijing of giving unfair export subsidies to its car manufacturers.

Washington is complaining that China has put US car makers at a disadvantage because it illegally subsidises exports of cars and car parts.

According to the US, the subsidies totalled $1 billion from 2009 through to 2011, and were a threat to the $350 billion US car making industry.

Beijing, however, was quick to retaliate, filing a complaint with the WTO over a new US tariff law that would allow Washington to impose some tariffs on Chinese goods.

China has become a major issue in the US presidential election, particularly in swing states like Ohio.

Mitt Romney, the Republican presidential nominee, has attacked Obama for being weak on China and for not standing up for American workers.

Romney has accused Beijing of cheating, and has promised to label Beijing a currency manipulator, if elected.

But Obama argues that Romney’s concern with fair trade is somewhat fabricated.

He says that when Romney worked in the private equity firm Bain Capital, he was a pioneer in outsourcing jobs to countries like China.